Cash, Cash Equivalents, and Federal Funds Sold
Highly Liquid Assets Including Overnight Lending to Other Banks
Cash, Cash Equivalents, and Federal Funds Sold is a line item commonly seen on the balance sheets of banks and financial institutions. It combines traditional cash and cash equivalents with federal funds sold—short-term (usually overnight) unsecured loans to other depository institutions in the federal funds market. This represents the bank's most liquid resources available for immediate operations, lending, or meeting reserve requirements.
Breakdown of the Components
This aggregated line includes:
Cash and Cash Equivalents
- Vault cash and currency
- Deposits at Federal Reserve (reserve balances)
- Deposits with other banks
- Very short-term investments (≤3 months)
Federal Funds Sold
- Overnight loans to other banks
- Settled through Fedwire
- Earn federal funds rate
Together, they form the bank's immediate liquidity pool.
Why Banks Report It This Way
Banks operate differently from non-financial companies. Their 'cash' isn't just for paying bills—it's actively managed for:
- Meeting daily settlement needs
- Satisfying reserve requirements
- Earning modest return on excess reserves
- Providing intraday liquidity
Federal funds sold turns idle cash into interest-earning assets overnight.
A Simple Example
A regional bank ends the day with:
- $50M in vault cash and Fed reserves → Cash/Cash Equivalents
- $150M excess reserves lent overnight to another bank → Federal Funds Sold
Total line: $200M. Next morning, the $150M returns plus a day's interest at the fed funds rate.
This cycle repeats daily—banks constantly lend excess and borrow when short.
How It Appears
On bank balance sheets (top of assets):
- 'Cash, Cash Equivalents, and Federal Funds Sold'
- 'Cash and Due from Banks' + separate 'Federal Funds Sold'
- Often the first or second asset line
Footnotes detail reserve requirements and average balances.
Real-World Dynamics
In normal times, banks minimize excess cash and maximize fed funds sold to earn the rate. During crises or when reserves pay interest (post-2008), banks hold large balances at the Fed.
2020-2023 saw trillions in reserves as QE flooded the system—fed funds sold dropped near zero.
What to Look For
- Size vs. deposits (liquidity coverage)
- Trend (rising = caution or excess reserves)
- Fed funds sold portion (active liquidity management)
- Interest earned vs. rate environment
- Comparison to federal funds purchased (net position)
Very high balances can mean low lending appetite or abundant system liquidity.
Key Takeaways
Combines cash equivalents with overnight interbank lending (federal funds sold).
Critical liquidity line for banks—used for settlement and reserves.
Fed funds sold earns the benchmark short-term rate.
Size reflects reserve policy, rate environment, and risk appetite.
Distinct from non-bank 'cash'—actively managed daily.
Watch trends for insight into banking system liquidity.
Cash, Cash Equivalents, and Federal Funds Sold
Highly Liquid Assets Including Overnight Lending to Other Banks
Cash, Cash Equivalents, and Federal Funds Sold is a line item commonly seen on the balance sheets of banks and financial institutions. It combines traditional cash and cash equivalents with federal funds sold—short-term (usually overnight) unsecured loans to other depository institutions in the federal funds market. This represents the bank's most liquid resources available for immediate operations, lending, or meeting reserve requirements.
Table of Contents
Breakdown of the Components
This aggregated line includes:
Cash and Cash Equivalents
- Vault cash and currency
- Deposits at Federal Reserve (reserve balances)
- Deposits with other banks
- Very short-term investments (≤3 months)
Federal Funds Sold
- Overnight loans to other banks
- Settled through Fedwire
- Earn federal funds rate
Together, they form the bank's immediate liquidity pool.
Why Banks Report It This Way
Banks operate differently from non-financial companies. Their 'cash' isn't just for paying bills—it's actively managed for:
- Meeting daily settlement needs
- Satisfying reserve requirements
- Earning modest return on excess reserves
- Providing intraday liquidity
Federal funds sold turns idle cash into interest-earning assets overnight.
A Simple Example
A regional bank ends the day with:
- $50M in vault cash and Fed reserves → Cash/Cash Equivalents
- $150M excess reserves lent overnight to another bank → Federal Funds Sold
Total line: $200M. Next morning, the $150M returns plus a day's interest at the fed funds rate.
This cycle repeats daily—banks constantly lend excess and borrow when short.
How It Appears
On bank balance sheets (top of assets):
- 'Cash, Cash Equivalents, and Federal Funds Sold'
- 'Cash and Due from Banks' + separate 'Federal Funds Sold'
- Often the first or second asset line
Footnotes detail reserve requirements and average balances.
Real-World Dynamics
In normal times, banks minimize excess cash and maximize fed funds sold to earn the rate. During crises or when reserves pay interest (post-2008), banks hold large balances at the Fed.
2020-2023 saw trillions in reserves as QE flooded the system—fed funds sold dropped near zero.
What to Look For
- Size vs. deposits (liquidity coverage)
- Trend (rising = caution or excess reserves)
- Fed funds sold portion (active liquidity management)
- Interest earned vs. rate environment
- Comparison to federal funds purchased (net position)
Very high balances can mean low lending appetite or abundant system liquidity.
Key Takeaways
Combines cash equivalents with overnight interbank lending (federal funds sold).
Critical liquidity line for banks—used for settlement and reserves.
Fed funds sold earns the benchmark short-term rate.
Size reflects reserve policy, rate environment, and risk appetite.
Distinct from non-bank 'cash'—actively managed daily.
Watch trends for insight into banking system liquidity.
Related Terms
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